The European Commission has published its final
report on the energy sector competition inquiry, concluding that consumers and
businesses are losing out because of inefficient and expensive gas and
electricity markets. Particular problems include high levels of market
concentration; vertical integration of supply, generation and infrastructure
leading to a lack of equal access to, and insufficient investment in
infrastructure; and, possible collusion between incumbent operators to share
markets. To tackle these problems, the Commission will pursue follow up action
in individual cases under the competition rules (anti-trust, merger control and
state aids) and act to improve the regulatory framework for energy
liberalisation (see also IP/07/29).
The Commission has already conducted a number of inspections in companies where
these particular issues warrant investigation.

Competition Commissioner Neelie Kroes said: “This report will make
uncomfortable reading for many energy companies. Underinvestment is rife,
especially in networks, and customers are suffering as a result. On the basis of
the solid facts contained in this report, the Commission will take further
action under the competition rules and act to improve the regulatory framework
with a view to ensuring that consumers benefit fully from liberalisation in
terms of secure, competitively priced and sustainable energy.”

Competition enforcement

The Commission will make full use of its powers under antitrust rules
(Articles 81, 82 and 86 of the EC Treaty), merger control rules (Regulation
139/2004) and state aid control (Articles 87 and 88 of the EC Treaty).

Market concentration is a major concern and careful scrutiny of future
mergers is essential to ensure the situation does not get worse. As in previous
cases (e.g. GdF/Suez - see IP/06/1558,
E.ON/MOL - see IP/05/1658),
the Commission will pay particular attention to:

divestitures, contract and/or gas release programmes

the impact of long-term upstream contracts on downstream
concentration.

Articles 81 and 82 also permit the application of
far-reaching structural measures as remedies to infringements.

Particularly when state subsidies contribute to maintaining concentrated
markets and prevent market liberalisation from taking root, rigorous application
of state aid control is called for.

The Commission will be vigilant concerning collusion between incumbents to
share markets, whichis one of the most serious threats to
competition and therefore remains a priority for antitrust enforcement action.
This reflects the overall priority of the Commission to fight attempts by
undertakings to coordinate their behaviour in the marketplace rather than to
compete.

Vertical integration between supply and generation and infrastructure
businesses appears to worsen competition problems by creating unequal access to
essential market information and by enabling incumbents to engage in strategic
behaviour.

Lack of access to infrastructure such as transmission and distribution
networks and/or storage facilities can lead to competition problems,
particularly where cross-border access is concerned, thereby preventing market
integration. Action in this field should include an analysis of long-term
capacity reservations and their effects on downstream competition.

Lack of, or delayed, investment by transmission companies with
vertically integrated supply companies, preventing market integration, is
another serious source of concern. For example, Italy's national competition
authority has found that a vertically integrated network operator deliberately
stopped an investment project in order to benefit its supply branch by depriving
competitors of access to more capacity.

Regulatory environment

Key issues relating to market structure and the regulatory environment will
also have to be addressed in parallel to enforcement in individual cases. The
sector inquiry has identified numerous general deficiencies in the regulatory
framework for electricity and gas markets that have been taken into account by
Commission's review of regulatory measures for the internal market in gas and
electricity (see MEMO/07/9).

Background

The sector inquiry was launched in June 2005 (see IP/05/716
and MEMO/05/203).
Initial results were presented in the form of an Issues Paper in November 2005
(see IP/05/1421
and MEMO/05/425).
This was followed by a preliminary report in February 2006 which launched a
public consultation (see IP/06/174
and MEMO/06/78).

In their submissions, stakeholders welcomed the report's objectivity and
level of detail. Contributions came from energy companies, both incumbents and
new entrants, from national regulators, competition authorities, consultancies,
law firms, energy traders, grid operators, customers, industry associations and
government agencies. Many called for reinforced regulatory measures. Only
incumbent – vertically integrated - operators opposed further measures,
notably ownership unbundling. Further information on the sector inquiry is
available at: